Random Thoughts: The Hope Trade Cometh

By Todd Harrison  SEP 27, 2011 10:30 AM

Policymakers float potential solutions through the media.

 


It’s Turnaround Tuesday in the ‘Ville and the legend is living up to its name. Equity markets are indicated higher, the dollar is down a full percent, and Europe is getting some groove on -- although the German market has simply rallied back to the global line in the sand at DAX 5500.

Why the sudden spring in the equity step? European “hope,” consistent with what was communicated yesterday. It would appear, however, the Policy Bazooka may take a different form, although any solution is subject to sovereign scrutiny and, by extension, political risk.

As shared (with permission) by the astute Phil Rosato:

“CNBC’s Steve Liesman broke the European Financial Stability Facility (EFSF) expansion story yesterday and the Dow breached 11,000. We know the ridiculousness of the statement -- it's not a new story, and implementation is still a ways off -- and the risk to the upside is continued momentum (and/or performance anxiety).

The EU has heard from the entire globe (including Treasury Secretary Tim Geithner) at the World Bank/IMF meeting. Let’s circle back to what (new) form the EFSF may take along with possible ECB measures (on October 6?):

Please note that Germany is voting on EFSF ratification on Thursday/Friday but this has nothing to do with the above-mentioned plan. Rather, it would allow the EFSF (in present form) to purchase bonds in the open market. Thirteen other EU nations will have to do the same (some votes aren't until November).

What's different now from last week when EU finance ministers were taking Geithner to task regarding a potential Euro TARP? The market. We retraced another 6% last week with the banks taking the brunt of the selling.

Would such measures, if adopted, rally markets? Absolutely. However, we're dealing with a 17-block Union that has done nothing but drag their feet and an ECB that raised rates two of last four months. Yesterday's rally -- like most in the second half of 2011 -- was a “risk to the upside trade". All of the above is market chatter and none of it is concrete. The market will continue to dictate policy, not the politicians.

Random Thoughts

R.P.

Twitter: @todd_harrison

No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.